Operational Execution

Hey, before we get into it, there is this other newsletter that you should definitely be checking out: The Column. I’ve been a reader for the past 2 years and it’s essential if you are in the chemical industry.

Agility

I’ve been thinking a lot about what separates a good company from a great one and I keep coming back to this concept of operational excellence or an ability to execute once given a direction and some constraints. A management consultant might take this a step further and call this ability to execute while also changing directions quickly from a prior path something different—agility. Your company might have the most amazing technology, Nobel Prize winning even, but if you cannot change course once the current has shifted then you have already failed.

If you are working in a company now just think about how long it takes to change something somewhat trivial where everyone is already in agreement. Let’s say its as trivial as changing the spindle on a Brookfield viscometer within a quality procedure and since your facility is likely ISO 9001 then it needs to be documented. Does it take a day to get this done or a week or two weeks? Whatever the time it is now imagine an emergency raw material qualification for a new supplier due to a supply chain shortage or you need to accept out of specification raw material in order to not shutdown your customers. How much longer does this take and do you have procedures and a clear path forward on making those changes? Imagine if everyone that needs to be in agreement is not and that has to happen before any work can get done. Now imagine trying to create a brand new product out of molecules and stuff, maybe even do a new type of polymerization.

If your company can’t do the trivial stuff well what makes you think they can execute complex stuff?

What is a company?

In thinking about this question we might view it as an agreement between shareholders, employees, customers, and the laws of the land where everyone benefits (if the company is profitable) including the government. The execution of how this company operates and it’s culture would be the character and soul of the company. Just as the body is a series of discrete chemical reactions happening in harmony a company is really just a series of tasks being performed by employees in a similar sort of harmony. To take this analogy a bit further, I think that the quality of how those business tasks are defined and executed speaks to the health of the company. A company that cannot execute operationally might as well be in a hospital bed.

I think of a company as possessing three pillars: free cash flow, the business processes (people doing their jobs), and the culture that binds it all together. If any one of those three pillars crumbles the company is in bad health if two falter expect the next to fall very soon or it’s on life support (cash injections).

In chemicals, our culture is often driven by the level of danger in the plant and in the labs. If you are working with really dangerous stuff at scale you can expect an attempt to foster a culture of safety, trust, and challenging going outside of established protocols. The less danger the less intense the safety aspect will be and the more things will be about cash and business processes or “innovation.” I still suspect that the chemical industry is entering a period of contraction in 2023 or even by the end of this year. Winter in Europe will be rough and the rest of the world will feel it. Costs will be cut (layoffs) and the people will take the brunt of those cuts to appease shareholders and keep the rest of the company gainfully employed. For most of us this is somewhat expected, anticipated even, and this is why it’s good to have other options available in your area in the event it does happen to you.

When a reduction in force is performed it is usually justified as ensuring that those who remain can survive and the shareholders get their returns. The issue with a reduction in force every few years is that the business processes, the execution of the work that keeps the company running, often gets marginally destroyed. The team of four that used to generate new safety data sheets might now be a team of three or two, and those who remain might be working more until they get burned out and someone leaves. They get replaced by someone who might be a dick and cost more. Culture gets eroded in favor of keeping costs low. The consequences almost inevitably manifest in faltering innovation, business processes crumble, culture deteriorates, and the company gets bought by their competitor and the shareholders get paid out. This cycle in the chemical industry has been perpetuating for awhile and it’s just what happens. We all know what happens It's just a matter of getting our timing right.

A Different Metric For Success

Investors often use metrics such as free cash flow to try and understand how to value a company. The more free cash flow the better, but can you guess how long that party is going to run and can you guess when it’s just a cash cow as opposed to a growth star? Can you deduce based on cash flow, spreadsheets, and numbers when the company goes from actual juggernaut to a hollow shell of itself. If anything, free cash flow is a derivative of a team that can execute that is held together with a great company culture.

[Insert favorite “Deep Tech” startup here] might have had a great technology stack that combines synthetic biology, chemistry, materials science, and/or enzymes, but if they can’t ship product and samples to customers with speed it just doesn’t matter. If I’m your customer and you can’t deliver a 5 gallon sample for free I’m not going to take you seriously because your competition (the incumbents) can deliver. If you are gonna charge way more it better be worth it too.

Operations rules everything. It’s the operators in the control room. It’s the engineers trying to figure out why the oxidizer keeps going down. It’s the guy in the warehouse making sure it’s first in first out. It’s the account manager getting yelled at on the phone by a customer. It’s the technician making $15/hour waiting for the viscosity to stabilize before signing off on a passed quality test. You need it all to work in harmony if you want to stay in this game for the long run.

Value a company based on their ability to ship products and samples at progressively higher scales as fast as your customers can send the requests. Bonus points if they can pivot at a reasonable pace when given new information too. The free cash flow comes later and often your existing cash flow for established companies was built on the execution from a decade or more ago by people who are no longer there.

If you think you can come into a place, slash costs, build out new business processes, and expect growth in the next two quarters then I wish you good luck.

♡🫡

Tony

Here’s some classic Billions clip that is marginally related to everything above, but this is really for the thumbnail on Twitter/social media shares.